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Rating Action:

Moody's affirms Soho House's Caa1 CFR; outlook stable

21 Sep 2015

Assigns (P)Caa1 to GBP200 million Senior Secured Notes due 2020

London, 21 September 2015 -- Moody's Investors Service has today affirmed the corporate family rating (CFR) and probability of default rating (PDR) of Soho House Bond Limited (Soho House) at Caa1 and Caa1-PD, respectively and has changed the outlook to stable from positive. Concurrently, Moody's has assigned a provisional (P)Caa1 rating on the new GBP200 million Senior Secured Notes (the Notes) to be raised by Soho House Bond Limited. Upon completion of the transaction, Moody's expects to withdraw the Caa1 rating on the existing GBP145 million Senior Secured Notes due 2018.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the facilities. A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

Moody's decision to affirm the rating follows Soho House's announcement on 17 September 2015 of the refinancing of its GBP145 million of senior secured notes due in 2018 and issued in September 2013 from the proceeds of new Senior Secured Notes with a 5-year tenor. The company expects to use the GBP200 million of proceeds to repay the existing notes, the outstanding drawings under its existing Revolving Credit Facility (RCF) and add about GBP19 million of cash to its balance sheet. In addition, Soho House announced it will enter into a new Super Senior RCF with a tenor of 4.5 years and a total facility amount of GBP30 million (compared with GBP25 million for the existing RCF), which Moody's expects to be undrawn at closing.

Following the transaction, Moody's expects Soho House's liquidity to improve and consist of approximately GBP24 million of cash and GBP30 million available under the new RCF, compared with a total available liquidity of GBP10 million as of 30 June 2015 (GBP5 million of cash and approximately GBP5 million available under the RCF). However, the transaction will also result in higher leverage and Moody's expects that adjusted debt-to-EBITDA (based on Moody's-adjusted EBITDA of GBP44.5 million as of 30 June 2015) will increase to around 8.2x compared with 7.3x prior to the transaction.

Despite the positive effect on the cash balance in the short-term, Moody's expects that the cash on balance sheet will decrease to around GBP10-15 million by the end of 2015, primarily as a result of the expected payment of GBP6.7 million of accrued interest related to the existing notes to be made at redemption and the fact that the company is free cash flow negative. Given the company's ambitious plan to open approximately 6 new houses and up to 30 new owned and joint venture restaurants in the next two years, Moody's expects that Soho House will remain cash flow negative over the next two years and mostly rely on its revolving credit facility to fund its expansion capex program. Furthermore, EBITA-to-Interest Expense is likely to remain below 1.0x for the next two years.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that Soho House's strong positioning in the membership club sector and the ramp-up of the houses opened in the past 2 years will support profitability improvement. However, leverage will remain high, with Debt-to-EBITDA above 6.5x and interest cover weak with EBITA-to-Interest Expense below 1.0x in the next 12-18 months. Moody's also expects that the liquidity will remain under pressure owing to high development capex and high interest costs.

WHAT COULD CHANGE THE RATING -- UP/DOWN

Moody's does not expect upward pressure on the rating in the near term, but this could change if (1) there is continued and sustainable growth in Soho House's profitability driven by successful penetration of new geographies, maturing of opened houses and restaurants and higher membership base; (2) the company maintains an adequate liquidity profile; and (3) free cash flow turns positive and the company shows visible de-leveraging progress.

Downward pressure on the rating could occur if (1) Soho House fails to execute its development and growth plans successfully, resulting in lower-than-expected growth in EBITDA and a failure to deleverage; (2) the company loses members (higher competition, resistance towards price increases); (3) Cash Flow from Operation (CFO) remains negative over several quarters, leading to strong liquidity pressures; and (4) the company fails to improve its current liquidity profile.

The principal methodology used in these ratings was Global Restaurant Methodology published in June 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Soho House is a fully integrated hospitality company that operates exclusive, private members clubs (or Houses) as well as public restaurants, hotels and spas. Membership targets professionals in the creative industries and access to Houses is reserved exclusively for members and a number of their guests. Soho House benefits from a stable membership and has been able to capitalise on its brand name to expand both in the UK and internationally. In 2014, Soho House realised total revenues of GBP202.8 million and EBITDA of GBP43.7 million (21.6% margin) including Moody's standard adjustments. EBITDA margin varies substantially between Houses according to location and improves over time with newly opened houses presenting lower profitability than more mature Houses.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Hubert Allemani
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Soho House's Caa1 CFR; outlook stable
No Related Data.
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